Question

Consider the following structural model

C₁ = a_o+ a₁Y₁

I₁=b_o +b₁Y₁+b₂Y_1-4

Y₁=C₁+I₁+G₁

Find the reduced form of the model, C and Y

Answer 1

$$Y=\frac {b_0-4+a_0+G_1}{1-b_1-b_2-a_1}$$

$$C=a_0+a_1\times \frac {b_0-4+a_0+G_1}{1-b_1-b_2-a_1}$$